Geopolitics Remains On The Radar
Geopolitics remains on the radar as the year ticks towards the final quarter of 2023, with DEFCON 3 level reached.
DEFCON measured the defence readiness of the US military, including its nuclear arsenal. DEFCON levels range from five to one, with five being the most severe to one being the least. POTUS sets the DEFCON level.
Multi-front wars in Europe and the Middle East are unprecedented in the nuclear age. DEFCON 3 was reached during the Cuban Missile Crisis in 1962.
But frankly, in 2023, the calibre of leadership on the stage falls far short of 1962. Biden is no Kennedy. So, a miscalculation, further escalation from DEFCON 3 to 4 or 5 is not inconceivable, horrific that may be.
Uninvestable Markets, a piece I wrote in May 2022, is precisely on the cards and what investors had handed in 2023. It was a mind’s eye into the future; Goldman Trader: The Markets Have Become Borderline Unplayable, a piece in Zero Hedge, a few days ago, October 2023.
I noted that with the Russian invasion of Ukraine, geopolitics would remain on the radar, and in 2023 geopolitics will remain on the radar even more.
Russia is a significant energy commodity producer, Ukraine’s proximity a logistics gas pipeline hub connecting a plentiful supply of Russian Gas to the rest of Europe, the EU with a 15 trillion dollar GDP in 2020. Moreover, Ukraine is Europe’s breadbasket.
Throw into the mix, the North Stream pipeline blown up in 2022 and an attack on Finland’s pipeline in 2023, and we have a global shortfall of vital commodities.
Geopolitics remains on the radar with war escalating in Europe and the Middle East because war is inflationary
There is cost-push inflation as war disrupts the global supply of food and energy, which pushes up prices for everyone.
War also disrupts supply chains, if trade along the Black Sea and the Persian Gulf is disrupted, the cost of vital commodities heads higher.
Geopolitics is on the radar as a shooting war is inflationary
Many resources are needed to keep the military functional from war materials, clothing, food, transportation, and training forces to fight an active war. The logistics of moving war material, essential into the theatre of war, is an operation in itself. It is how Greece developed its merchant shipping navy post-WW2.
But fighting a war also leads to demand-pull inflation and massive shortages of resources funnelled into the war economy.
High inflation and black markets are typical in wartime, which is why top investors see cash performing poorly.
We could see a melt up in commodities and stocks in companies supplying the war economy. These are not just munitions companies. Companies supplying army boots, semiconductor chips, to food all benefit from a wartime economy.
So deteriorating geopolitics remains on the radar as war is inflationary, which could feed the bond bear market.
If so, perhaps the bear market in bonds may not be over.